The speed with which most academic research is obsoleted, especially in the social and behavioral sciences, is something of a punchline. It is deserved to some extent, but there are a number of "classics" in any field which stand the test of time. In political science, McCubbins and Schwartz produced their seminal work on Congressional oversight in 1984 and it hasn't been improved upon in the intervening years (although Aderbach's Keeping the Watchful Eye from 1990 expands upon it). If this paragraph has thus far caused your eyes to glaze, I promise this is more interesting than it sounds.
Congress is constantly delegating authority to various Federal agencies – the EPA, Securities and Exchange Commission, FDA, etc. – and one of the fundamental questions of politics is how (or if) Congress can control them after handing over the keys. Staffed largely by unelected (and un-fire-able) civil servants, the agencies are something of a leviathan and Congress can very quickly lose control of policy. Traditionally it was thought that oversight required Congress to hover over the agencies and crack the whip when they deviate from their mission. Yet there is no evidence that this happened, so it was widely assumed that Congressional oversight was limited at best.
McCubbins and Schwartz relied on a very old concept – classic Madisonian pluralism – to solve the puzzle. Their analogy, not to mention the title of the paper, is "Fire alarms vs. police patrols." The police engage in costly hands-on oversight. They cruise around looking for crimes being committed and, provided the offender is black or Latino, they chase after them yelling, "Stop, evildoer!" This is time- and labor-intensive. It costs a lot of money. But preventing crime is judged to be worth the cost. The fire department operates much differently. They don't cruise around looking for fires. They are organized to respond quickly, but only when someone says "Hey, there's a fire!" In this scenario, you and I are effectively the regulators.
This idea was intended to describe how Congress monitors regulatory agencies, but it has come to accurately describe the behavior of regulators themselves. This is partly by design – Reagan-era ideas about "getting government off our backs" – and partly of financial necessity. The public and interest groups become the regulators, sounding the "fire alarm" when necessary. It's not always a great system. The Food & Drug Administration (or the FAA, or OSHA, or whatever) has nowhere near enough people to do police patrols, actively seeking out safety violations. So they respond to fire alarms, i.e. a few dozen people get e.coli, someone loses an arm in a kick press, or a plane goes down. Both the regulatory agencies and the Congress that ostensibly monitors them are designed to react, not to prevent. Neither the political will nor the resources to engage in preventative regulation exist.
OK. Now the point.
…creates an Office of Consumer Protection within the [Financial Institutions Regulator]. The Office of Consumer protection is responsible for all consumer protection rulemaking under the Consumer Credit Protection Act, and will coordinate with the other divisions of the FIR in enforcing consumer protection. Establishes a consumer complaint hotline for the timely referral and remedy of consumer complaints, regardless of charter type or regulatory structure. Requires the Office of Consumer Protection to use extensive consumer testing prior to the promulgation of new consumer protections. Requires a comprehensive review of consumer protection rules and regulations on a regular basis with reports to be issued to Congress based on inaction or action with regards to consumer protection standards.
So the GOP idea of regulation is a hotline, a phone in the basement at Treasury. We wait until something devastating happens and then we spring into action…by calling this number and saying "Hey, something devastating happened!" well after the opportunity to do anything meaningful has passed. N.B. the cute language about "testing" regulations and doing a periodic review so Congress has a regular opportunity to cut whatever the banks are complaining about.
It is entirely understandable that Congress oversees regulatory agencies in this manner. Their time is finite and the demands for their attention are many. For the agencies themselves, however, this is demonstrably the worst possible way to regulate. It gives us little more than good autopsies; the role of Federal agencies is to show up after the fact and explain the disaster they failed to prevent. So what we are getting in terms of financial reform (and I defer the nuts/bolts to Mike) is a regulatory body that will be empowered to do little except write a nice, detailed 9/11 Commission Report for the next crash. If we can't regulate derivatives I guess that's the next best thing, right?